Masayoshi Son's SoftBank Group is planning what it is calling "the most significant IPO in the history of the semiconductor industry" by taking UK-based chip designer Arm public on Nasdaq this year or early next year.
The Japanese tech conglomerate immediately pivoted to the IPO plan for Arm on Tuesday after long-running regulatory and industry objections finally forced the termination of US chipmaker Nvidia's US$70bn-plus acquisition.
When the purchase was first announced in September 2020, the cash and stock consideration (the latter representing about two-thirds of the total) plus an earn-out valued Arm at US$40bn. But a sharp rally in Nvidia's share price over the past year lifted the implied value of the deal to more than US$70bn.
SoftBank now hopes to take Arm public on Nasdaq by March 31 2023, though the tough US IPO market and pressure on chip valuations may make it difficult to match the value the Nvidia deal would have delivered.
Speaking on SoftBank's earnings conference call on Tuesday, SoftBank's founder and CEO Son would not say whether the IPO would value Arm as highly as the Nvidia deal.
"We don't know yet, because it's a market decision how the share price will [trade] after Arm goes public again," he said, but added he was convinced Arm was entering a "golden phase" and "second growth stage".
SoftBank is yet to run a bake-off, according to bankers, though most expect M&A advisers Goldman Sachs (one of SoftBank's advisers) and Morgan Stanley (Nvidia's adviser) to have an inside track in leading the IPO, especially as two leading ECM tech houses.
Outgunned
Arm was listed on the London Stock Exchange (with a secondary listing on Nasdaq) until it was taken private by SoftBank for US$32bn in 2016. It now looms as one of the biggest new issues in the US ECM pipeline, with little prospect of the company listing closer to home.
A UK-based IPO adviser said the general assumption that all tech companies should list in the US shows the power of Nasdaq's brand. "The LSE is being outgunned," he said.
It is also the case that Arm has many peers listed in the US but none in London.
Big deal
Though bankers expect Intel's planned IPO of autonomous driving unit Mobileye to ultimately rank as 2022's biggest US new issue, Arm is likely to raise more than last year's US$2.6bn Nasdaq IPO of chipmaker GlobalFoundries and – if SoftBank's boast of "most important" is taken as a synonym for size – more than the biggest chip IPO on record, the US$3.6bn NYSE IPO in 2001 of Agere Systems, which is now part of Broadcom.
According to SoftBank, Arm generated US$900m of adjusted Ebitda from a 26% jump in revenue of US$2.6bn last year. Though scoring a similar adjusted Ebitda multiple to Nvidia would push Arm's enterprise value over US$70bn, other chip companies trade on much lower multiples and Arm would likely need to come at a discount.
Most of Arm's engineers are based in Cambridge, UK, but the company is also embroiled in a management dispute with its China unit.
SoftBank had “reluctantly” agreed to sell Arm to Nvidia due to Covid-19 uncertainty and as part of its monetisation programme, Son said, and is now returning to the original plan by looking to take it public again.
Though SoftBank, which owns 75%, does not want to sell a large percentage of Arm in the IPO, it has to consider third-party investors in SoftBank's Vision Fund, which owns the other 25%.
"If they were trying to optimise the amount of capital from the IPO they probably would have gone with London, but the normal course in the US is to sell only 10%–20% of the business at the IPO," one senior ECM banker said. "SoftBank is generally not trying to monetise large sums via IPOs. Historically they have been massive users of funky derivatives products to free up capital in an efficient way and minimise taxes."
It is worth noting that the UK in December dropped the free-float required to 10% from 25% to attract more tech listings.
Arm’s processors are used in nearly all smartphones and most tablets and digital TVs. Since SoftBank bought the business, Arm has invested in AI, autonomous driving and internet of things technology.
“Arm has been powering the smartphone revolution,” Son said. “Going forward, we believe that … Arm product is going to power auto, cloud, metaverse [and] IoT. That's how they've been evolving.”
Break fee
The failure of the Nvidia deal was not a total loss for SoftBank. It gets to keep a US$1.25bn deposit Nvidia had put down (essentially the break fee). Nvidia retains its 20-year licence enabling it to sell CPUs based on Arm's designs.
SoftBank's plans for Arm come as stock price slumps in its other large holdings, including Chinese e-commerce firm Alibaba and Chinese ride-sharing firm DiDi Global, saw it report a 10% quarter-on-quarter decline in book value to US$168bn as of December 31.
Son said SoftBank, the biggest provider of venture capital in the world last year, was in a "blizzard storm" that had not ended.
“In fact, the storm got stronger in the US and other countries. Although the peak of the Covid-19 pandemic [has] passed, now long-term interest rates are going to be higher [so the] stock prices of growth companies are still in the middle of the storm," he said.
Separately, SoftBank denied speculation it was planning to sell part of its one-quarter stake in Alibaba after the latter hinted at the prospect by registering with the SEC for the sale of 1bn of its NYSE-listed ADS earlier this month.
The London Stock Exchange Group, which owns the LSE, also owns IFR.
